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4 Pieces of Legal Advice That Sound Good … But Small Business Owners Should Ignore

Author: Katie Truesdell Date: August 08, 2014

Tread carefully on legal matters, and always read the fine print

As a small business owner, you’ve likely received plenty of advice—solicited or not—over the years. If you come across these four common pieces of misguided legal advice, however, steer clear.

“Just get started and worry about business technicalities later.”

One of the most erroneous pieces of advice preached to small business owners is to delay incorporating until hitting an income or personal net worth threshold, says Lily Starling, owner of Downtown Davis Massage and Wellness in Davis, California. 

While delaying paperwork hassle and incorporation filing fees may sound appealing, failure to incorporate could leave you personally liable for injuries or damages. For instance, if your pizza delivery guy accidentally hits a pedestrian, there cold be serious legal consequences, says Matthew Reischer, CEO of New York-headquartered LegalAdvice.com, a Web platform that connects legal professionals with people needing legal help.

“A lawsuit can send you into bankruptcy whether or not you have assets and income to garnish,” Starling says.

In addition to liability issues, bypassing proper organization such as a corporation or LLC can mean costly litigation to resolve intercompany disputes about company structure, says Matthew Saltzman, a Las Vegas attorney for Kolesar and Leatham who works with many small businesses.

“Skip attorneys and go online.”

Generic contract templates from the Internet can be wholly unsuited to your company and leave you exposed, says Allen, Texas, attorney Kathy Van Every, who works closely with small businesses. Contracts must be tailored to the individual situation, she says. If they aren’t and something goes wrong, sending the dispute to mediation, arbitration or litigation, the contract alone determines resolution. If your contract is not specific to your agreement, you could be liable for unexpected costs and work.

Avoid general online legal advice as well, says Michael Salmon, who works almost exclusively with small businesses as a principal attorney at SalmonLaw in New York City. Otherwise, you may end up spending significant time and money to undo what you’ve done. For example, Salmon worked with clients who followed simplistic online advice in forming their company but failed to include key provisions like how each founder will fund the project when money runs low or how to regain shares that weren’t fully earned when a partner exits early.

Noncompete agreements are unenforceable.”

Fort Lauderdale, Florida, attorney Jonathan Pollard often hears small business owners say they’ve hired someone with a noncompete agreement but aren’t worried because they’ve heard “noncompetes don’t hold up.”

“That advice is beyond worthless,” he says. “It’s dangerous and can result in the company getting sued for tortious interference.”

The truth, Pollard says, is that noncompete law is complicated, often misunderstood and varies tremendously by state. Each case must be analyzed according to the agreement and state law. Before signing the offer letter for an employee with a noncompete agreement, seek legal advice.

“Classify your employees as independent contractors to save money.”

For small business owners trying to save on overhead costs—like insurance and benefits—this may sound ideal.

But there are strict legal definitions of employees and independent contractors (see the U.S. Small Business Administration’s outline of the difference). Misclassifying your workers can create substantial legal liability with respect to taxes, workers’ compensation, unemployment insurance and wage-and-hour liability, cautions Joseph Harris, partner with employment law firm White Harris in New York City, which works with many small businesses and startups. Misclassification also can result in additional fees, penalties and legal costs.

Misclassification can be discovered through lawsuits and government agencies, Harris says. Audits arise commonly when a former contractor applies (non-maliciously) for unemployment insurance benefits, out of financial desperation or lack of knowledge.

 

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